Editorial: Washington’s excess profits from student loans

With Congress stuck in a destructive standoff over student loans, Sen. Elizabeth Warren has cut through the confusion with an important question: Why should the federal government be generating billions in profits on the backs of America’s college students?

Milford Daily News

Writer

Posted Jul. 14, 2013 at 12:01 AM
Updated Jul 14, 2013 at 2:04 PM

Posted Jul. 14, 2013 at 12:01 AM
Updated Jul 14, 2013 at 2:04 PM

» Social News

With Congress stuck in a destructive standoff over student loans, Sen. Elizabeth Warren has cut through the confusion with an important question: Why should the federal government be generating billions in profits on the backs of America’s college students?

Those profits are considerable, topping an estimated $51 billion this year, Warren says. That money comes from lower- and middle-income students and their parents. Why should we narrow the budget deficit on their backs? If investing in a better educated workforce is in the national interest – as we believe it is – why not extend to students the same low-interest loans the Fed gives the nation’s biggest banks?

Unfortunately, those fundamental questions are being lost in disputes over how high student loan interest rates should be set. The Senate missed a July 1 deadline to prevent interest rates from doubling to 6.8 percent, and failed again Thursday to find a compromise that could clear that body’s 60-vote threshold.

If investments in higher education have an intrinsic value, the proposed House bill is short-sighted. If the intent is to subsidize the costs of education for those who can't afford it, the proper rate of interest should be well below market rates, should be set by Congress and should be a welcome cost to society. The House-passed bill would peg interest rates at 2.5 percent above a variable rate, determined each year by the yield on 10-year Treasury notes. The Congressional Budget Office estimates those rates would rise to 7.7 percent within the next 10 years.

President Barack Obama also has suggested pegging interest rates to a 10-year Treasury note but having them fixed, not variable, for the term of the loan. He would cap payments at 10 percent of a borrower's income.

What's lacking in all of these proposals are the commonsense solutions recommended by credit counselors, consumer advocates and students drowning in $1 trillion of existing student debt.

That would include: increased funding for outright grants to talented students; loan forgiveness after a period of years; permitting student loan debt to be discharged in bankruptcy; limiting or ending lending to students with mediocre high school records who are unlikely to graduate; and making students from upper middle-income and affluent households ineligible.

Record levels of student debt are a drag on the economy as well as an unfair burden on young people and their families. The best solution at this point would be freezing rates for another year while Congress and the country pursue a broader discussion that begins with Warren’s questions.